VALLAT MAURICE HENRI ROLAND v. PHOENIX TELECOMMUNICATION LTD

CACV 237/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 237 OF 2004

(ON APPEAL FROM dcmp nO. 3403 OF 2003)

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J U D G M E N T

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Hon Yeung JA (giving Judgment of the Court):

1.  The protagonists in this case include Mr Vallat Maurice Henri Roland (Vallat), Phoenix Telecommunication Limited (Phoenix), Dragon Investment Company II LLC (Dragon) and Antares LLC (Antares), although only Vallat, Dragon and Antares are actively involved in the present dispute.

2.  Shortly before the hearing of the appeal, Vallat informed the court by letter that as his application for legal aid has been rejected, and “he had no mean to fly to Hong Kong”, he would not attend the hearing.

3.  Dragon was a minority shareholder of Phoenix. Its unsuccessful attempt to wind up Phoenix in HCMP No. 514 of 2002 (the Action) resulted in an adverse costs order of about $650,000 (the Debt) in favour of Phoenix.

4.  Antares was the majority shareholder of Phoenix. Antares’ majority shareholder – Mr Shanahan, is the husband of Ms Fox, one of the directors of Phoenix

5.  Vallat, a French national and a former employee and director of Phoenix, had on 17 August 2003, obtained judgment against Phoenix in the Labour Tribunal for about $600,000 (the Judgment).

6.  On 11 October 2003, Vallat obtained a garnishee order nisi (the garnishee order)in the District Court (DCMP 3403 of 2003) against Dragon that the Debt should be paid to him to discharge the Judgment.

7.  In December 2003, Vallat sought to make the garnishee order absolute whilst both Antares and Dragon opposed it.

8.  Antares suggested that, by an agreement dated 25 September 2003 (the assignment), Phoenix had assigned the Debt to Antares with written notice of the assignment given and received prior to the making of the garnishee order.

9.  It was Antares’ case that it had agreed to pay Phoenix’s legal fees to Messrs Barlow, Lyde and Gilbert, against the agreement by Phoenix to pay Antares the taxed costs to be recovered from Dragon in the Action.

10.  Antares relied on the assignment, although an earlier agreement, allegedly approved by the board of Phoenix in November 2002 to the same effect, had been made.

11.  The suggestion was that the earlier agreement had been lost.

12.  It was Antares’ case that Vallat was involved in concluding such agreement although he refused to sign the resolution endorsing the agreement.

13.  In its summons dated 8 December 2003, Antares only sought to discharge the garnishee order.

14.  On the other hand, Dragon suggested that the substantial claims it had against Phoenix exceeded the Debt. Dragon pointed out that it was sued for over $9 million in High Court Action No. 1180 of 2003 and it had third partied Phoenix, seeking indemnity or contribution. The Third Party Notice was served on Phoenix on 24 September 2003.

15.  Dragon also questioned the composition of Phoenix’s board and the validity of its decisions relating to the assignment.

16.  There was evidence that the payment of the legal fees to Messrs Barlow Lyde and Gilbert was made by Mr Shanahan and not by Antares.

17.  Both Vallat and Dragon suggested that the assignment by Phoenix in favour of Antares was not bona fide, but an attempt to defraud Phoenix’s creditors.

18.  Vallat and Dragon emphasized that when the assignment was executed on 25 September 2003, Vallat had already obtained the Judgment and Dragon had already served the Third Party Notice on Phoenix.

19.  Vallat denied the suggestion that he had agreed to the assignment. He said he was not involved in the discussion of the agreement for the payment of the legal fees to Messrs Barlow Lyde and Gilbert. He also said he did not in fact agree with the minutes of the meeting relating to such agreement.

20.  Dragon further suggested that it also had claims against Antares in excess of the Debt.

21.  The matter went before Judge Muttrie (the judge) in the District Court on 19 May 2004 and he had to deal with it urgently as Vallat was in a hurry to return to France. 

22.  Despite the wordings of its summons seeking only the discharge of the garnishee order, Antares, in the course of its submission by Mr Hudson, also invited the judge to declare that the assignment was a valid one.

23.  Mr Hudson made it clear though, that Antares was not seeking immediate payment of the Debt.

24.  Mr Cook, on behalf of Dragon took objection, saying that there were issues of fact that needed to be resolved, possibly by cross-examination of witnesses.

25.  The judge, without hearing any evidence, summarily dismissed the claims by both Vallat and Antares, i.e. Vallat’s application to make the garnishee order absolute and Antares’ claim for a declaration that the assignment was valid. The judge did not mention the effect of his order on the garnishee order.

26.  The judge concluded that before Dragon’s claims against Phoenix was resolved, it was not possible to determine if the Debt could be attached to satisfy the Judgment or validly assigned to Antares.

27.  The judge further suggested that the directors of Phoenix, most of whom were connected to Antares might have intended to “clean out” Phoenix of its assets in order to defeat others’ claims against Phoenix. The judge felt unable to exercise the discretion in favour of Antares.

28.  Having been granted leave by the judge, Antares now appeals against his order of 19 May 2004.

29.  Mr Clifford Smith, SC, on behalf of Antares raises two main points.

30.  As against Vallat’s claim, it is suggested that written notice of the assignment was given and received prior to the making of the garnishee order and hence the Debt was not capable of being garnisheed.

31.  As against Dragon, it is suggested that Dragon has nothing to set off against the Debt as it does not have a liquidated claim and is subject to a judgment to pay the Debt.

32.  Mr Smith points out that Dragon had not sought a stay of the payment of the Debt pending the trial of its claims against Phoenix and in any event it would be wrong to allow any set off when Dragon’s claims against Phoenix did not arise out of and were not connected to the Debt.

33.  Without trying to avoid the obvious inference that the assignment was made in order to “prefer Antares” to other creditors of Phoenix, Mr Smith emphasizes that the motive for making the assignment was immaterial and that once the notice of assignment was served on Dragon, the legal right to the Debt was transferred to Antares.

34.  Mr Smith also argues that there was no suggestion that the assignment was a “sham” or “mock” assignment.

35.  Whether there was any suggestion of a “sham’ and “mock” assignment, the allegation that it was not a bona fide or valid one could not have been made clearer.

36.  If the assignment were a valid one, then it would have defeated the garnishee order as written notice of the assignment was given and received prior to the making of the garnishee order. Antares would also, prima facie be entitled to payment of the Debt by Dragon, subject only to any valid set-off and/or counterclaim.

37.  Whether Antares could enforce the assignment, even if it was bona fide and valid, against Dragon is perhaps not an immediate issue that needs to be resolved as Antares made clear before the judge that it was not seeking payment of the Debt.

38.  The issues of set-off and/or counterclaim would only arise if Antares is seeking payment of the Debt. For the same reason, any application by Dragon for a stay of the payment of the Debt to Antares is also pre-mature.

39.  On the other hand, when Antares sought an order from the court that the assignment was valid, Vallat and Dragon would be entitled to object; Vallat in order to maintain the viability of the garnishee order and Dragon in order to defeat any enforcement action of the Debt by Antares.

40.  If the issue relating to the assignment is resolved in favour of Antares, Vallat can drop out of the dispute, leaving only the issue of enforcement to be decided between Antares and Dragon; and if the issue is resolved against Antares, the only remaining issue is whether Dragon can establish any set-off against the Debt, a dispute just between Vallat and Dragon.

41.  It was therefore crucial to resolve the primary issue of whether the purported assignment of the Debt to Antares was a bona fide and valid one.

42.  Indeed that was how Mr Hudson, on behalf of Antares, attempted to place the issues before the judge as borne out at page 29 lines P – T of the transcripts, although he had actually reversed the order of the issues to be decided:

“The position, your Honour, is this. The application that Antares has made is simply that the garnishee order nisi obtained by Monsieur Vallat be discharged. There is no order at the moment sought for payment. Obviously enforcement proceedings will have to be brought but we’re not here to decide that today. This is why we say that much of what – much if not all of what Mr Cook says is not relevant. However, as I said earlier, I think that if you find in our favour and you discharge the garnishee order, I will ask for a declaration that the assignment is valid on the basis that that is the reason why you are finding in our favour in the first place, so one should follow the other, and I would ask for a declaration. That is the position. I hope that helps.”

43.  In order to set aside the garnishee order, Antares would have to firstly satisfy the court that the assignment was bona fide and valid. On that issue, Vallat and Dragon had raised a number of allegations.

44.  Both Mr Smith and Mr Manzoni, in the course of this appeal,  have taken us through the possible issues.

45.  It may not be necessary to actually identify all those issues for the purpose of the present appeal as those issues had not, in our view, yet been clearly and properly engaged.

46.  However, both Vallat and Dragon alleged that the assignment of the debt was not bona fide or valid, but an attempt to defraud Phoenix’s creditors. Reference was made to other attempts to “clean out” Phoenix of its asset, including the sale of its assets to Duck Ltd and the moving of its office out of Hong Kong.

47.  There was a suggestion that it was Mr Shanahan, and not Antares who paid the legal fees to Messrs Barlow Lyde and Gilbert. There was a suggestion that the board of Phoenix was not properly constituted when it agreed to assign the Debt to Antares and the agreement was therefore not valid.

48.  Vallat also denied the suggestion that he was involved in the discussion leading to the assignment.

49.  There were certainly prima facie materials to justify Mr Cook’s observation that “the whole thing is so incestuous”.

50.  We are not persuaded, despite Mr Smith’s effort, that the issue can be resolved without being properly engaged by pleadings and after a trial. The judge was certainly entitled to reject Antares’ claim for a declaration that the assignment was a valid one.

51.  Despite the fact that the garnishee order could only be properly dismissed if the assignment was valid, the judge decided the disputes between the parties on the basis that Dragon’s claims against Phoenix had to be resolved first whilst brushing aside the main and primary issue with the following comment:

“It seems to me that the sale of the Phoenix assets to Duck Ltd at the same time as Phoenix made the assignment effectual certainly suggests an intention on the part of the directors of Phoenix, most of whom are connected to Antares, to ‘clean out’ Phoenix so as to defeat the claims of others and it would not be proper to make an order which would aid that.”

52.  With respect, Mr Hudson fell into error by suggesting a declaration that the assignment was valid should automatically follow the discharge of the garnishee order and that the judge might not be right by resolving the issues in the manner as he did.

53.  The validity of the assignment must be adjudicated upon first and the only proper way to resolve the issue, in light of the contents of the affidavits filed by the parties, was to hear evidence and not by way of summary trial on affidavits.

54.  Mr Charles Manzoni, on behalf of Dragon, suggests that the judge had found that Dragon was entitled to set off its counterclaims against Phoenix, and thus there was no debt to attach.

55.  He also suggests that the refusal to make the garnishee order absolute had the effect of setting it aside.

56.  Mr Manzoni maintains Dragon’s position that the assignment was not bona fide or valid. He suggests that Antares had not properly brought the issue before the court for adjudication and in any event, the issue could only be properly resolved after trial, and not by affidavits.

57.  With respect, the judge had not and could not have made any finding that Dragon was entitled to set off its counterclaim against the Debt. Dragon’s alleged counterclaim and the extent of such counterclaim had not been established.

58.  The judge, at most, was just making the observation that if Dragon had a valid counterclaim exceeding the Debt, there would be no debt to garnishee or to assign.

59.  The judge should have adjourned Vallat’s application to make the garnishee order absolute or stay the order until the disposal of Dragon’s counterclaim and/or Antares’ claim for a declaration that the assignment was valid.

60.  We initially took the view that as the validity of the assignment had yet to be resolved and Dragon had not yet proved its counterclaim, it was premature to dismiss the garnishee order on those bases. We also doubt that the judge’s refusal to make the garnishee order absolute had the automatic effect of discharging the garnishee order nisi.

61.  However, as Vallat had neither appealed nor chosen to appear in court and it was doubtful if he still wanted to be involved, and to avoid the possibility of the garnishee order nisi hanging in the air, it would be preferable to have it set aside, which both Antares and Dragon wanted, as long as Vallat’s right to re-apply would not be prejudiced should Antares fail to establish the validity of the assignment, and Dragon fail to prove its counterclaims.

62.  At present, we felt unable to accede to Mr Smith’s request for a declaration that the assignment was a valid assignment. We agree with Mr Manzoni that the issue must be properly engaged by pleadings and resolved at  trial.

63.  The issue would have to be addressed in any event should Antares wish to seek payment of the Debt from Dragon.

64.  We do not propose to set aside any of the judge’s orders except to clarify, for the avoidance of doubt that the garnishee order nisi is set aside without prejudice to Vallat’s right to re-apply.

65.  Subject to the aforesaid, Antares’ appeal is dismissed with the following costs order nisi:

(1)	as between Vallat, and Antares and Dragon, there will be no order as to costs of this appeal; and
(2)	as between Antares and Dragon, Antares to pay 50% of Dragon’s costs of this appeal to be taxed if not agreed.

66.  If the parties wish the court to make directions on any further conduct of the proceedings in order to resolve the issue relating to the validity of the assignment, the court will be happy to oblige and make such order as may be necessary. The application can be made on paper and for the avoidance of doubt, Vallat should be notified of and should have the liberty to take part in any such proceedings.